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Ukraine: Where Are You Going?

Michael Werbowski
December 20, 2009

A Ukrainian police officer stands amongst boxes sprayed with a radioactive symbol thrown by Green Party activists during a demonstration near parliament in Kiev on Dec. 17 protesting a bill proposing the construction of a radioactive waste dump in the Kiev region. (Photo: Sergei Supinsky/ AFP-Getty Images)

Ukraine is eager to end the marathon round of talks that would guarantee the fourth and final tranche of a $16.4 billion loan from the International Monetary Fund (IMF) by the end of this year. The government hopes to assure this loan ahead of upcoming presidential elections. According to the New York Times, the IMF is playing a waiting game with Kiev and plans to withhold the $3.5 billion final tranche until after the presidential elections, which are due to be held January 17. The loan was approved in the midst of the global financial crisis, in late 2008. Yet it appears, the results of the upcoming presidential election will be a crucial factor in sealing the deal for the final disbursement of the IMF "lifeline," or cash injection, on which Ukraine's faltering economy depends to stay afloat.

In addition to these loans, Ukraine has requested an additional $2 billion in urgent "emergency loans," according to the Financial Times, in order for it to ensure the flow of natural gas through its transit country, which originates in Russia and is destined for Western European markets. Ukraine has seen its gas supply shut off in the past by Moscow, due to its failure to pay Russia outstanding energy debts. The Moscow-Kiev gas disputes, or "wars," which often center on pricing and delayed payments owed on the Ukrainian side, has led to interruptions in gas exports to several E.U. member states in the midst of winter. This has added to the perception abroad of Ukraine being an unreliable trade partner.

Kiev comes to Midtown Manhattan

At a conference in New York City earlier this month, organized by the Financial Times and the Kiev-based "Foundation for Effective Governance," Western diplomats, Ukrainian philanthropists, entrepreneurs and politicians gathered to assess the country's present, in an attempt to chart a roadmap for its uncertain future. The country has been hit hard along with the Baltic States in the ex-Soviet bloc region during the 2008 global financial meltdown. Its development is further hampered by endemic corruption, a lack of diversification in its economy and a weak banking sector. "What we need is strategic patience" when dealing with the Ukraine, former U.S. Ambassador William Taylor told a captive audience in Kiev.

"We need to understand that Ukraine is a work in progress," he added. Indeed, it has been a long hard slog so far for Ukrainians. The country is situated in an ill-defined geopolitical zone, a kind of no man's land. It is neither in NATO nor the E.U., unlike the Baltic states or its Western neighbors—Poland, for instance. The former Soviet republic's NATO candidacy and perhaps eventual membership is still "in the cards… but it's up to the Ukraine," as one of the speakers put it.

Ukraine, despite its newfound national revival on the political map, remains wary of a resurgent Russia that still considers it to be its "backyard." This is a major concern for Washington. And it was clearly conveyed in Ambassador Taylor's remarks. "It is in the [West's] strategic interest that Ukraine succeeds in maintaining its independence and sovereignty," he said.

Ukraine gained its independence in 1990, in the wake of the failed KGB attempted August coup in Moscow, and has struggled to resist the gravitational pull of its former Russian overlord ever since then. After the so-called "Orange revolution" in November 2004, its leaders—despite constant bickering and infighting, especially between the current President Viktor Yushchenko and Prime Minister Yulia Tymoshenko—have been almost obsessed with distancing themselves from Moscow. Western powers have sought to assist these attempts by sponsoring loans to Kiev and mentoring the state's fledgling democracy with "good governance "techniques." Nevertheless, Ukraine is mired in endless economic woes. As mentioned earlier, so far only IMF funding has kept the country from falling over the cliff and into default on its foreign debt.

The country is also hobbled by other obstacles—a Byzantine bureaucracy, onerous regulations and permits, a flimsy concept of the rule of law that is exemplified by the lack of bankruptcy protection laws, and high taxes. A clear and viable tax code is nonexistent. Above all, inviolability of property rights is not yet guaranteed. Legalization is lacking in these crucial areas. Passing laws that would make Ukraine more congenial to international investors will be a top priority, it seems. That was the message delivered to the conference participants by lawmakers such as Vladyslav Kaskiv, a member of the Ukrainian parliament, and his legislative colleague Irina Akimova.

Added to this is the political uncertainty that exists in the run-up to the presidential elections and beyond. This, for instance, poses problems for long-term infrastructural projects. As Georgina Baker, the director of Global Financial Markets at the World Bank's International Financial Corporation (IFC)—whose investment program in Ukraine amounts to about $500 million—put it, "There are still a lot of uncertainties, as the country is heading for a presidential election in January, and I think investors are looking for stability and coordinated efforts of different branches of government after the elections." As far as Ukraine's long-term financial health is concerned, she added, "My feeling is that there is some recovery, at least in certain sectors, agriculture being one of them. We are also seeing that the banking sector has survived through the initial shock. And we hope that it will start financing the real economy."

Yet despite certain perceived and real hindrances to doing business in the country, "great [profit] margins make it easier to navigate in this environment," Oleksky Skrypnik, CEO of Eleks Software Company, said.

Ukraine: a "Ferrari in a cave" or a failed state?

The country, with its great potential (a well-educated and low-wage work force, a crucial East-West transit corridor, etc.), remains overshadowed by Russia. Referring to the authoritarian tendency next door, Ukrainian MP Mrs. Akimova said that she "would strongly prefer a Ukrainian mess to Russian order." The question is does the Western businessman agree with her viewpoint on this? The country has been described as a "Ferrari in a cave and an unopened pearl," by potential investors, yet it still hasn't gotten its act together.

The elusive prospect of E.U. membership isn't helping, either. According to Mr. Skrypnik, 20 years after the fall of communism in Europe, "Brussels has built a new Berlin wall on Ukraine's western border." For Ukraine, "the E.U. is now far away," he added. Meanwhile, Ukraine is still west bound and on course for more "radical reforms," which are supposed to lead it towards a free-market economy. Whether it can achieve a stable and functional democracy as well is quite another story.

Michael Werbowski is a Prague-based reporter and post graduate in post-communist studies from the University of Leeds.